Portfolio companies paying down debt piles

SVG Advisers (SVGA) says private equity has always been a cyclical business, with its fortunes rising and falling in line with prevailing market sentiments. However, SVGA research suggests private equity portfolio companies performed considerably better during the downturn, suffering only a short period of falling profits. It analysed 50 unrealised underlying portfolio companies within its fund of funds over the past four years.

The research suggests the average private equity portfolio company saw EBITDA contract for just one year during the downturn, before returning to growth. This comes despite revenue growth falling through both 2008 and 2009, implying that management actions were largely responsible for maintaining profit margins. SVGA says that, within its own fund-of-funds, it found private equity managers had taken significant strategic action to ensure the smooth running and continued profitability of their investments.

SVGA also discovered many private equity fund managers had worked with portfolio companies to deal with debt burdens, which can put major strain on companies even if they remain profitable. In 2006, net debt in portfolio companies was approximately 6.3x EBITDA, but despite falling revenues this is estimated to have fallen to around 4.7x in 2010. Restructurings and renegotiating maturity periods are largely responsible for the fall in debt levels, according to SVGA.

However, the fund-of-funds manager warns portfolio company management not to get complacent. The economic situation remains fragile, with Ireland's sovereign debt crisis late last year, and the risk of further shocks in the months ahead. Private equity would not be immune from a double dip recession, SVGA says, but with the right action portfolio companies should weather a second deterioration in market conditions.

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